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Borneo Post August 17, 2013, Saturday

DEEPLY UNDERVALUED: CIMB Research believes that CMS’ stock remains deeply undervalued, at a 48 per cent discount to its RNAV of RM10.45 per share, even after it had surged 60 per cent YTD, spurred by renewed investor interest in its dominant position in Sarawak via SCORE.

KUCHING: CIMB Investment Bank Bhd (CIMB Research) believes that the stocks of Cahya Mata Sarawak Bhd (CMS) is still undervalued even after its year to date (YTD) surge, with its position to benefit from the Sarawak Corridor of Renewable Energy (SCORE) over the long term.

As the sole cement and clinker manufacturer in Sarawak with a capacity of 1.75 million metric tonnes (MT) per annum, CMS stands to gain from cement-demand growth which should be underpinned by SCORE’s development.

“With development in SCORE expected to pick up over the next five years, local cement demand is expected to exceed supply over the next two years as existing plants are running at 90 per cent capacity, close to their maximum,” CIMB Research highlighted.

Cement remains the group’s biggest revenue and profit generator having contributed 43 per cent to group revenue and 29 per cent to group pretax profit in financial year 2012 (FY12). Its near-monopoly gives the group pricing power, that is, zero rebates compared to Peninsula Malaysia.

The group’s construction materials complement its cement, construction and property-development businesses. It currently operates five quarries with licences of up to 20 years with a rated capacity of 3.2 million MT per annum, controlling 23 per cent of the market in Sarawak.

Other facilities are six premix plants with market shares of 50-60per cent, and a 5,500 MT per annum facility to manufacture steel wires and mesh with a market share of 15 per cent. In line with the progress of SCORE, it will be expanding its quarries and wire facilities.

In its property division, earnings have been climbing since 2012 thus allowing the group to aim for more aggressive launches with new products over the next 12-18 months.

While property development makes up just 11 per cent of group profits, there is stable longer-term potential from its huge land bank consisting of two large land parcels in Kuching measuring 4,511 acres and other smaller parcels. The progress of SCORE should catalyse property demand for CMS.

Generally, CMS is directly exposed to SCORE within the Samalaju Industrial Park. Its first exposure is the Samalaju Development, where the group provides worker accommodation and other services.

This business should continue to grow as more workers populate the area together with upcoming projects in the industrial area.

Contributions from this venture were 11 per cent in FY12 (maiden profits) and with high barriers to entry as it is the only government-approved provider of worker, supervisor and executive camps in Samalaju.

The 2,000-acre land will be developed over 10 years on a fast-track basis and will also include hotels and serviced apartments by mid-2014.

In terms of new associate earnings, CMS aims to add more to its earnings with its 20 per cent investment in OM Materials Sarawak Sdn Bhd (OM Materials) – the first ferrosilicon alloy, manganese ferroalloy and sintered manganese ore facility in SCORE.

This facility is touted as one of OM Holdings Ltd’s (OM) – the 80 per cent stakeholder – lowest-cost plants in the region as the price of hydro power is generally 20-30per cent cheaper than in India and China.

“As such, CMS expects RM80 million-100 million in new associate profits from this project from 2016, representing 45 to 57 per cent boosts to the group’s average pretax profits in the past three years, by our estimates,” CIMB Research projected.

As SCORE is expected to make rapid progress in the next few years, the management will try to make new investments in energy-intensive industries beyond its OM Materials venture for more recurring income.

Overall, CMS hopes to derive a profit mix of 50:50 from SCORE and non-SCORE projects from 2016 onwards.

With all these insights into long term gains, CIMB Research believed that CMS’ stock remains deeply undervalued, at a 48 per cent discount to its revised net asset value (RNAV) of RM10.45 per share, even after it had surged 60 per cent YTD, spurred by renewed investor interest in its dominant position in Sarawak via SCORE.

Its re-rating was also triggered by progress of its venture in OM Materials and the fact that management has been more proactive engagement of investors in the past year.

“It is clear that CMS’s earnings are set to scale new highs, in line with the more rapid progress of SCORE and infrastructure rollout in Sarawak under the 10th and 11th Malaysia Plans,” the research house opined.

Unlike other pure building-material/cement companies, CMS’s businesses go beyond cement, rendering it a direct proxy for and beneficiary of the progress of SCORE in Sarawak.

“ Pegging a 30 per cent small/mid cap discount to our RNAV of RM10.45 per share, the stock is worth RM7.31 per share, in our reckoning, implying upside of 37 per cent.

“The more upbeat valuation basis now reflects our positive expectations on the progress of SCORE and management’s clearer growth strategy,” CIMB Research reiterated.

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Diesel shortage hits palm oil sector

BY HANIM ADNAN
NEM@THESTAR.COM.MY

KUALA LUMPUR: A repeat episode of the diesel shortage in Malaysia this year can badly jeopardise the entire supply chain for palm oil, one of the country’s top revenue earners, warned industry players.

Sidhu Brothers Group, the country’s leading palm oil tanker haulage company, is hopeful that the Government could come up with a “fixed” long-term solution to counter the diesel shortage, which has been rampant particularly in the past seven years.

Its commercial director Jimmy Sidhu told StarBiz that: “This can be via narrowing down the price differences between the government subsidised diesel and non-subsidised diesel for industry users.

“Another option is for a total removal of fuel subsidy eventhough it can be a rather painful decision to make.”

This year, the Government is expected to fork out RM19.46bil to subsidise diesel versus RM19.5bil last year.

In Malaysia, there are two parallel diesel markets – legally subsidised diesel and illegal siphoning/smuggling of subsidised diesel with their own market clientele.

“This is a lucrative market as the difference between non-subisidised diesel at RM2.67 per litre and subsidised diesel at RM1.80 per litre is 87 sen per litre,” said Jimmy who is a palm oil logistics expert.

He said: “The current cheaper local subsidised diesel makes it a constant target of rampant smuggling or syphoning into neighbouring countries where diesel prices are mostly sold higher than Malaysia.”

He pointed out that the consequences of continued delay in transporting fresh fruit bunches (FFB) to palm oil mills could lead to decomposition, thus affecting the palm oil extraction rate (OER) content.

The OER is an important performance indicator for crude palm oil (CPO) production.

“The higher the OER means better CPO production,” said Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad.

Once the quality of FFB deterioriates due to late delivery to the mills, the OER percentage would drop.

“Just 1% drop of OER per month in the country can translate into a loss of almost 77,000 tonnes of CPO per month valued at about RM212mil per month based on an average CPO price of RM2,764 per tonne in 2012.

“This is a big loss per month for Malaysia if the diesel shortage is prolonged for one month,” explained Jaafar.

Last year, the monthly average OER for Malaysia is 20.35% while the monthly FFB processed by mills in Malaysia is about 7.69 million tonnes.

For palm oil refiners, Jaaffar noted that the issue was on the delivery of CPO to refineries and from refineries to the bulking installation and/or port for export shipment.

There would be shutdown of refineries because of unavailability of CPO deliveries, build-up of stocks if processed palm oil cannot be shipped out in time, demurrage charges at the port because palm oil cannot be loaded on the ships, product quality drop and lost of business because of non-delivery performance which does not bode well for the local palm oil industry.

“This will affect Malaysia’s reputation as a reliable supplier of palm oil globally often touted by the Malaysian Palm Oil Board and Malaysian Palm Oil Council,” he added.

It is estimated that there are 2,000 palm oil tankers in Peninsular Malaysia alone.

Each tanker can carry an average 30 tonnes of CPO and processed palm oil (PPO).

“In a single day, there will be a movement of about 60,000 tonnes of CPO and PPO from mills to refineries and from refineries to the ports.

“Also, bear in mind that this does not include the FFB trucks which must supply the FFB to the mills every day,” explained Jaaffar.

Meanwhile, Jimmy pointed out that Sidhu Brothers Group has a timely delivery agreements, which cannot exceed 24 hours once the FFBs are harvested at the oil palm plantations.

“We are penalised based on the time recorded from the point it is harvested to mill. But because the national diesel shortage is beyond the operators’ control, the penalties are usually waived,” he added.

However, this would not resolve the problem. In fact it becomes worse for the palm fruit harvesters to generate income.

“The harvesters will quickly move on to other jobs as they are usually 100% based on commission because harvesting and transporting are outsourced to another party. Further delays will result in overripe fruits due to delays in harvesting and transporting,” explained Jimmy.

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